THERE are two main types of private pensions; a defined contribution (DC) pension, which is based on how much is paid in, and a defined benefit (DB) pension, which is based on your salary and how long you’ve worked for your employer.
DC pensions involve you, or your employer, paying money into a pension pot that is then put into investments by the pension provider.
Often referred to as final salary pension schemes, DB pensions are always workplace pensions that are arranged by your employer. Many DB schemes also have rules that entitle workers to take a lower level of income from their pension entitlement in exchange for a cash lump sum.
According to insurance company Royal London, six million people with DB pensions have seen their transfer values increase dramatically in the past year, due to continuing low interest rates.
There are a number of benefits to transferring a DB pension, such as the possibility of extra tax-free cash, a more flexible retirement income and a potentially easier inheritance, as funds can be passed on to heirs.
Whilst this option may work for some, it is important to note that keeping a DB scheme may be a more sensible option, as they can offer extremely valuable inflation protection, the certainty of an income for life, and a risk-free income, which does not depend on the ups and downs of the stock market.
Current rules state that those who transfer their DB pensions have to sell the whole thing, increasing the element of risk, as this means that you could be left with a much smaller pension pot.
If you’re eligible to transfer your DB pension, I highly recommend speaking with your financial advisor before making the decision to sell. They will be able to talk you through the best options suited to your financial situation.